Thursday, September 25, 2008

Extra Credit Assignment

So the Mets won, and I allowed myself an extra hour or so of bacchanalia as a result. That was a good decision. But then I made a bad decision. I decided to watch cable news for 30 minutes or so as I nursed my final beverage of the evening. Now typically, Mrs. Side Bar watches cable news with me, and talks me off of the ledge while I scream at some a-hole who just announced that "there is some dispute" over something that is obviously either true or false, and over which there cannot possibly be any rational dispute. But tonight, Mrs. Side Bar was already in bed, and I was left to grow more and more furious with each click through CNN, MSNBC and Fox News (sidenote: whatever, man; know thine enemy).

Tonight's topic: the credit crisis. And more specifically, the House Republican caucus, whose members have decided to block (or at least try to frustrate) the bi-partisan deal that was struck earlier in the day to resolve said crisis. They claim that they won't stand for a government bailout of those "fat cats on Wall Street who were stupid enough to get in to this mess in the first place." (my words, despite the quotation marks). They claim that their constituents are up in arms about the whole thing, and they won't stand for it. Eat me.

Here's the thing: the very people who are "up in arms" about the proposed federal bailout of so-called "toxic" mortgage securities, are the very people who stand to benefit the most.

See, the entire problem with the American economy right now begins and ends with one word: credit. I think LJT was correct the other day when he posted that we have become a nation of credit card debt, but that doesn't mean (and I don't think he was suggesting) that our nation would be better off if no one could get credit. Small and modest-sized loans from financial institutions are a net good for our economy. People with extra cash invest it with their local bank in a savings or money market account, and in exchange get a nice little interest payment at the end of each month. People who need extra cash borrow money from the same bank at a slightly higher interest rate, and the bank profits by pocketing the difference between the two rates. Now that is way too simplistic, but seriously, that's basically how it works: even with super-complex credit derivatives and structured investment vehicles, if you lend money at a rate that exceeds the cost of borrowing money, you can (and many people did) make a profit.

The problem here is that with mortgage-backed securities taking a nose dive, and with financial institutions invested too heavily in those MBS, no one is willing to extend credit, because they are afraid that they are already over extended, and they don't want to exacerbate the problem by lending money to someone who might not pay it back. In other words, it's all well and good that Mrs. Jones has invested $100 with my bank at a rate of 2%, but before I loan her money out to Mr. Smith at 6%, I better make sure I am not completely underwater on some of the other loans I made to Mr. Wilson, Mr. White, and Mr. Johnson a few months ago. Oh shit. Turns out I am.

The result of all this? No credit. No one - not individuals, not small businesses, not huge corporations - can get a loan right now.

Why is this a big deal? Credit makes our economy hum. You buy a car, some guy in Detroit doesn't get laid off (but you can't buy the car without a decent loan from the bank). You buy a house, two carpenters a plumber and the cable guy are in business (but no way you can afford the house without a reasonably priced mortgage from the bank). You want to start a high-tech company that produces alternative sources of energy on the cheap, to millions of Americans benefit (but you can't get a loan from Deutsche Bank because they won't extend credit to anyone). Some huge company is ready to come out of bankruptcy and start turning a profit again? They can't. Citibank won't fund that $350 million loan they promised. Etc.

I haven't worked in this industry for too long (and I don't really even work in this industry), but I have done it long enough to know that there has never been a time like this in anyone's memory. No one can get a loan right now. It permeates every transaction in the country. Everyone with any cash to lend is hording it like the fucking rapture is coming before Open Bar's 30th. It is a very scary time to need to borrow money. And it is only going to get worse when the MBS that these firms are carrying at $0.60 on the dollar (i.e., they already lost 40% on the securities, giving rise to the current crisis) turn out to be worth $0.25 on the dollar. Or less.

But here's the kicker: the very people who are opposing the federal bailout that might reverse, or at least stem, the credit crisis (because removal of toxic securities from the balance sheets of financial institutions would allow them to: (a) know what they have in terms of assets and liabilities, and (b) free up some capital for extension of loans, thus making credit available again) are the representatives of the very people who would benefit the most from the package.

When right-wing senators and congressmen from impoverished states (I'm looking at you, Dick Shelby (R-AL)) stand on ceremony and insist that "my constituents won't stand for this" they aren't hurting me. I live in a densely populated part of the country where the service economy and not the manufacturing economy is king, home ownership is optional, owning a car is downright stupid, and we earn a salary that permits us to get by without hitting up the local WaMu for a home equity loan. Instead, they are fucking over their own constituents. I'll be fine if I can't get a car loan, mortgage, or decent rate on my AmEx for 18 months. What about the guy working two jobs, making $7.15 an hour, and unable to get out from under one or two bad decisions he made when he was 22. Where is that guy going to be when Alabama First National tells him they won't loan him a dime. What about the lady who works at some huge factory in North Carolina? She is going to lose her job because the CFO can't get Wachovia to finance their new expansion that otherwise would have generated millions in new revenue.

I don't like the federal bailout either. If there are 280 million of us, then everyone's share of $700 billion is $2500. That sucks. But do me a favor, before you piss and moan and bitch about it, ask yourself if you can live with the alternative. For god's sake, when George Bush and Nancy Pelosi agree on something, it's time to shut the fuck up and listen to them.